Working Papers

Current Expected Credit Losses and Consumer Loans, with Joao Granja,

R&R at Journal of Accounting & Economics

We use data from TransUnion, a large U.S. credit bureau covering millions of individual consumer loans, to examine the transition to the Current Expected Credit Loss (CECL) accounting standard and to provide novel evidence about the impact that raising reserve requirements has on banks' pricing and lending decisions in the U.S. consumer lending market. We find that greater reserve requirements following the adoption of CECL induce a statistically significant but economically moderate increase in loan interest rates. The effects are more pronounced for weakly-capitalized banks and even more so for underprivileged individuals borrowing from weakly-capitalized banks. Our evidence informs the ongoing policy debate between standard setters and members of the financial industry about the potential effects of CECL on credit markets.

We show how to measure the welfare effects arising from increased data availability. When lenders have more data on prospective borrower costs, they can charge prices that are more aligned with these costs. This increases total social welfare and transfers surplus from borrowers to lenders. We show that the magnitudes of the welfare changes can be estimated using only quantity data and variation in prices. We apply the methodology on bankruptcy flag removals and find that removing prior bankruptcy information substantially increases the social surplus of previously bankrupt consumers, at the cost of a modest decrease in total allocative welfare. We show how the framework can be extended to incorporate adverse selection and imperfect competition.